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BIDU is on one gargantuan roll. Its stock has soared over 11 fold in less than two years, and its earnings are expected to grow 64% in 2011 (from $1.53 to $2.51) (forward P/E of 57) and 47% in 2012 (from $2.51 to $3.69). Obviously, its growth rate has to slow (it is slated to decrease 1700 basis points in 2012) due to the law of larger numbers, but has this fact been accurately discounted in the current share price?

Probably not, because if you calculate BIDU’s PEG (price earnings to growth) it computes to a lackluster 1.57, using its current trailing P/E of 92 and a very optimistic five year growth rate of 58.47%. Does this growth rate consider the possibilities of Google (NASDAQ:GOOG) getting back into the Chinese search fight, an “earth shaking” political event in China, or even something as basic as a misstep in execution?

A search engine bargain: if you compare BIDU to YHOO, you might be amazed that although YHOO is expected to earn 14% more in 2011 ($997 million vs $876 million) than BIDU, the Chinese search engine’s stock is valued at more than twice as much, and to make matters worse, YHOO’s $3.5 billion cash hoard is three times greater than BIDU’s. Throw in the fact that YHOO is selling at a mere 1.77 times book value compared to BIDU’s nosebleed ratio of 38 times book value, and you have the recipe to easily detect the difference between a very undervalued situation and one of extreme bubble-like proportions.

The current perception that YHOO is a “dog with fleas” and BIDU can "do no wrong" is precarious, as the market is fickle and can turn on a dime. You could argue that BIDU is priced to perfection and YHOO is priced for failure, but don’t be surprised if the market starts "feeling the love” for Yahoo while its infatuation with BIDU fades, because in my book, in terms of stock picking, high expectations are bad, and low expectations are good.

Yahoo for free? If you add up YHOO’s cash, its 35% interest in Yahoo Japan, 39% ownership stake in Alibaba (the Chinese versions of Amazon (NASDAQ:AMZN), eBay (NASDAQ:EBAY) and PayPal) and its Chinese internet platform, you come up with assets of $22 billion, roughly equal to its current market cap. It appears that YHOO’s pieces are worth more than its whole, and that status makes it a prime Private Equity target to exploit by monetizing those assets. Just imagine, at its current market cap, a potential suitor could buy the company and get its core operations for free.

The verdict - buy YHOO, sell BIDU. BIDU has already met its median analyst one year price target of $142 and is only 16% below its most bullish analyst target of $165, while being 33% above its low target price of $95. If you put any credence to these analyst target prices, why would anyone bother risking a 33% loss for a potential 16% gain?

On the other hand, besides being an obvious takeover target, YHOO is still 13% below its median target price of $19 and about 42% below its highest target price of $24. Who knows? BIDU might even make a play for YHOO, as it could do so by merely printing up and exchanging about 175 million shares as payment to YHOO’s existing shareholders. Stranger things have happened.

Disclosure: I am long YHOO.